Levy was to secure international bailout

Lawmakers in Cyprus decisively rejected a plan on Tuesday to seize up to 10 percent of people’s bank deposits in order to secure an international bailout and prevent a collapse of the country’s banks.

The vote leaves the tiny Mediterranean economy in financial limbo, but hundreds of protesters outside Parliament cheered and sang the national anthem when they heard the bill failed.

Cyprus needs 15.8 billion euros ($20.4 billion) to bail out its heavily indebted banks and shore up government finances. If it doesn’t get the money, the banks could fail, Cyprus’ government finances could be ruined for years and the country could face expulsion from the 17-country euro currency union.

Eurozone countries and the International Monetary Fund have pledged to provide 10 billion euros ($12.9 billion) in rescue loans if Cyprus can come up with the remainder.

With the country’s banks closed since Saturday to avoid a run, Cypriot leaders will now try to hatch a more politically palatable plan that might also satisfy officials in the eurozone and IMF.

The plan that was rejected Tuesday — with 36 votes against, 19 abstentions and one absence — had been amended to shield the smallest depositors, those with under 20,000 euros ($25,858) in the bank. But deposits up to 100,000 euros ($129,290) are supposed to be insured by all euro countries. There has been widespread condemnation of the plan throughout Europe since it was announced over the weekend.

Global financial markets were on edge Tuesday, but investors so far have taken the latest turmoil in Europe in stride. The Cypriot economy is tiny and there is hope that Europe’s political leaders can find a way to bolster the country’s finances and prevent it from leaving the euro.

“This is not the end of the process, but instead kicks off a further round of negotiation,” said Alex White of JPMorgan. “The Cypriot authorities wanted to conduct the vote so that they could reaffirm the extent of their difficulties to the Europeans.”

Part of the reason for the market calm is that the European Central Bank has promised to do whatever it takes to protect the euro. It has a plan in place to buy the government debt of any countries that fall into financial trouble, provided they ask for help. That has helped keep bond market borrowing rates manageable for Italy and Spain, for example.

The ECB said after the Cyprus vote that it would continue providing liquidity to Cypriot banks to prevent their immediate collapse. Some had feared that if Cyprus rejected the bailout, the ECB might stop providing support, letting the banks fail.

Of the 15.8 billion euros ($20.4 billion) that Cyprus needs, roughly 8.3 billion euros ($10.7 billion) is for its two top lenders — Bank of Cyprus and Laiki Bank, which is effectively controlled by the government already. About 7.5 billion euros ($9.7 billion) would be used to finance the country’s deficits over the next four years and to cover a 1.5 billion euro ($1.9 billion) debt payment that comes due in June.

Cypriot political leaders will meet with President Nicos Anastasiades on Wednesday to discuss the next steps.